A pipe instead of the sea: how Trump gave the Power of Siberia - 2 project a chance at life

Alexey Belogoryev, Research and Development Director of the Institute for Energy and Finance, commented on the future of the Power of Siberia 2 project to Forbes.

The reason for China's change in position is obviously related solely to geopolitics and the growing tension in relations with the United States, Alexei Belogoryev said.

"Trump has made a significant contribution to this with his reckless customs war," he says. —Power of Siberia-2 competes with promising supplies of liquefied natural gas to the Chinese market. Accordingly, the return of interest in the project is directly related to the reassessment of risks regarding the safety and reliability of marine communications, which are associated with LNG transportation."

Although the signed memorandum does not provide an absolute guarantee, it is still an important step forward, Alexey Belogoryev notes. It is important because China has quite clearly stated its interest in the implementation of the project, the expert emphasizes:

Today, it is difficult to assess the profitability of the project, which will depend on the dynamics of prices in foreign markets, including oil, the timing of the construction of the pipeline, inflation, and the costs of the entire life cycle, including not only gas transportation, but also exploration and production, the analyst believes. However, it is important that the authorities of a number of regions associate with the project the prospects for gasification of southeastern Siberia - the Krasnoyarsk Territory, including Krasnoyarsk itself, certain areas of the Irkutsk region, Buryatia and Khakassia. In addition, the project will have a multiplier effect, as it will require a significant amount of equipment, materials, large-diameter pipes, and the involvement of a large number of Gazprom subsidiaries and third-party contractors.

"So, of course, this is an important prospective customer for the Russian industry, from metallurgy to mechanical engineering," he says.

For China, this project is one of the most important components of its energy supply system, which is an alternative to the maritime transportation of energy resources.

"Therefore, China, firstly, gets a long-term, reliable, relatively cheap source of gas, and secondly, it binds Russia to itself more economically and politically," Belogoryev points out.

China needs Power of Siberia-2 as a safety net, Belogoryev adds.

"Although this has not been directly stated in any way, I am almost sure that today China is not ready to guarantee the full utilization of the design capacity of the gas pipeline — 50 billion cubic meters per year, even 45-47 billion, if Mongolia takes on some volume," the expert argues. — I think that in reality China can give guarantees for today for a maximum of 25-30 billion cubic meters per year. And the rest is a kind of reserve capacity that can be used in conditions of higher demand or some kind of geopolitical upheaval. China sees the prospect that some kind of blocking sanctions, possibly an embargo or blockade, could undermine or at least reduce LNG supplies to the country for some time."

How will the Power of Siberia - 2 affect the global gas market

If Power of Siberia - 2 is built and China chooses gas within its design capacity, this will deal a severe blow to the prospects for global LNG demand, Alexey Belogoryev notes.

"If we take 2035, then 50 billion cubic meters of Power of Siberia - 2 will be equal to 35-37 million tons of LNG per year, or about 5% of the expected global demand in the second half of the 2030s," he says. — This is a significant amount. If such a volume falls out of the market, then there will be an additional factor of imbalance in the global LNG market in the late 2020s and early 2030s. Some manufacturers will have to reconsider their investment plans and abandon the construction of some plants."

Although the main impact will be on American plants, the Power of Siberia - 2 will also be bad news for Russian LNG projects, for which China has become the main promising sales market, Belogoryev predicts. A decrease in demand for Russian LNG may lead to a reduction in its production, the expert believes.